Archive for the ‘Tax Fraud’ Category

Yes, Illegal Income Is Taxable

Sunday, July 19th, 2015

If you commit fraud do you have to report the illegal income on your tax return? Absolutely! Illegal income is just as taxable as legal income. Al Capone went to prison not for the murders and other crimes he committed but for tax evasion.

William Richmond of Atkinson, New Hampshire learned that lesson. He held a durable power of attorney and used that to allegedly commit fraud. This past week he pleaded guilty to tax evasion (but not the underlying fraud); he failed to report the illegal income on his tax returns. As part of his plea he will be required to make restitution to the couple he stole from. He may also be heading to ClubFed.

A Peabody, Massachusetts Tax Preparer Gives an Unwitting Endorsement for EFTPS

Sunday, June 28th, 2015

Barry Ginsberg operated a payroll tax service in Peabody, Massachusetts (near Boston). He endorsed escrow accounts for his clients; they would send him the money for the payroll taxes and he, in turn, would pay them. Since I’m writing about this, you’ve already figured out where the money didn’t go: to the IRS and the Massachusetts Department of Revenue. Mr. Ginsberg, who was indicted back in 2013, pleaded guilty to multiple tax fraud charges on Friday.

Mr. Ginsberg operated a traditional payroll service. It’s fairly easy to check on your payroll company if you use such a service: Enroll in EFTPS. Using EFTPS you can verify that your payroll company is making the payroll deposits they say they are. That’s a good idea–trust but verify. The DOJ Press release notes:

To cover up his scheme, Ginsberg falsified his clients’ tax returns, which he was hired to prepare, indicating that the clients’ payroll taxes had been paid in full, when they had not. When asked by clients about their mysterious IRS debts, Ginsberg gave them a litany of false excuses, including blaming the IRS and his own staff.

None of those excuses work hold up with EFTPS. Today, payroll tax deposits with the IRS are all made electronically. Is it possible for one to get messed up? Yes, but it’s very unlikely. Indeed, most payroll companies just make sure the deposits are made from your payroll bank account.

Mr. Ginsberg will likely be spending years at ClubFed. Unfortunately, the business owners who trusted him may be spending years getting out of debt with the IRS and Massachusetts.

Foreign Earned Income Exclusion Gets a Vegas Preparer in Hot Water

Sunday, March 15th, 2015

I prepare quite a few returns with the Foreign Earned Income Exclusion. The Exclusion allows bona fide residents of a foreign country or individuals who are outside of the United States for 330 days out of a 365-consecutive day period to exclude about $99,000 from income tax. Of course, you do have to be outside of the US (or otherwise qualify) to take the Exclusion. That minor distinction was allegedly forgotten by a Las Vegas tax preparer.

Harvey Cage owns CSN Tax Services. He faces a lawsuit from the US Department of Justice alleging that he not be allowed to prepare returns containing the Foreign Earned Income Exclusion. The DOJ alleges in the lawsuit that Mr. Cage ignored the qualifications required to claim the Exclusion, and that he claimed it for lots of his clients who weren’t entitled to it. The tax loss to the US is estimated at $3.7 million. That’s a lot of clients taking the Exclusion.

What Mr. Cage allegedly did is noted in the complaint:

On behalf of these clients, Mr. Cage filed forms 2555 claiming a foreign earned income exclusion for which his clients were not entitled. Mr. Cage typically wrote on the top of form 2555 “CLAIMING WAIVER” and attaching a statement entitled “REQUEST FOR CONSIDERATION OF 330 DAY WAIVER.” These requests for waiver of the 330 day period were made irrespective of the Internal Revenue Code, associated Treasury Regulations, relevant Revenue Procedures listing of eligible countries, and IRS published guidance on the issue.

The waiver being referred to is noted in the DOJ Press Release:

This period can be waived when the Secretary of the Treasury determines, after consultation with the Secretary of State, that individuals were required to leave a foreign country due to war, civil unrest or other conditions that preclude the normal conduct of business, among other things. In implementing this waiver provision, each year the Secretary of the Treasury publishes a list of countries that have been determined eligible for waiver requests. According to the suit, Cage ignored the published list of waiver-eligible countries in filing for his customers’ exclusion of foreign earned income.

I’ve yet to file based a return with the Exclusion based on the waiver list. The DOJ allegations make it seem like Mr. Cage shouldn’t have filed any based on the waiver, too.

“Give us a tax code that is simple enough for taxpayers to comply with and simple enough for the IRS to administer, and you’ll dramatically reduce fraud.”

Thursday, March 12th, 2015

It’s not brain surgery. Tom Giovanetti hits the nail squarely on the head in his op-ed in The Hill.

Mr. Giovanetti notes that keeping the voters happy is why fraud prevention hasn’t been a big issue. But it is now, when identity theft (which voters really dislike) is mixed into the fraud. Add in the IRS’s lackidaisical attitude in the past and you have a recipe for massive fraud.

It’s not as if the IRS didn’t know about the fraud.

A July 2012 TIGTA report noted that problems “had been brought to [IRS] management’s attention long ago” via a September 2002 report, but “management has failed to take sufficient action to address those deficiencies.”

For the IRS, it might be nice to shift priorities toward this and away from your Quixotic battle for regulating tax professionals (this year, the Annual Filing Season Program). Meanwhile, I’ve tried for three days to call the IRS Practitioner Priority Service only to hear, “We’re sorry, but due to extremely high call volumes on that particular subject you’re call cannot be answered at this time.”

I’m Sure This Will Endear Him To The Judge

Sunday, March 8th, 2015

You’re about to be sentenced on 20 felony convictions. You wouldn’t just flee the country, would you? Well Alan Rodrigues tried to do just that.

Mr. Rodrigues was convicted last May on charges that he led a national scheme to defraud the IRS.

Oryan Management has developed a simple, “Turn-Key” method for you, the ordinary taxpayer to receive these Tax Credits and Deductions while keeping your costs low. Depending on how you pay your taxes, you could reduce your next quarterly payment by more than your out-of-pocket expenses for the year.

In addition to offering positive cash flow and business stability, Oryan assures your peace of mind by providing Pre-Paid Audit Protection on your tax return.

That was from their marketing materials. The IRS investigated, and things went downhill from there. Mr. Rodrigues was found guilty of 20 felonies.

On February 25th, Mr. Rodrigues boarded a bus to San Ysidro, California–just across the border from Tijuana, Mexico. He ended up in a jail cell here in Las Vegas after the FBI discovered his trip. That he was carrying $63,000 on him at the time may have cemented law enforcement making a quick but likely accurate judgment that Mr. Rodrigues longed to leave the US rather than face sentencing. No such luck; he’ll be sentenced on Monday.

It Was the Sisterly Thing To Do

Sunday, March 1st, 2015

Three Wisconsin sisters allegedly decided that tax fraud and identity theft should stay in the family. They’ve been accused of filing 2,000 phony returns by the Wisconsin Department of Revenue.

The Staten sisters (Sharon, Tawanda, and Angela) face 22, 28, and 40 felony charges respectively. It appears the investigation began when Angela and an alleged accomplice, Anthony Coleman, were arrested at a traffic stop in East Troy, Wisconsin. The police found a fake income tax return along with other related evidence and forwarded that information to the Department of Revenue.

As to the scheme itself, it appears to be identity theft on a fairly large scale. With the help of accomplices, the sisters used the names of prison inmates to allegedly file the phony returns. While the DOR did stop many of the returns from being processed, the sisters allegedly took the department for $234,390. It’s a certainty that if the Wisconsin allegations are true that they took the IRS for more than that. The returns appeared to have been filed mainly with TurboTax.

At least one of the sisters is in prison with bail being set at $10,000. It’s quite probable that if that traffic stop hadn’t happened the sisters (if the allegations are true) would still be trying to fleece Wisconsin and the IRS.

“Ripping Off Your Refunds” In the Miami Herald

Sunday, February 22nd, 2015

There is an excellent article in the Miami Herald on the identity theft tax fraud crisis. The epicenter of this is South Florida (as noted in the article). I don’t have much to add to the frustrations of victims with the IRS’s conduct in these cases. One quote:

“The IRS call center person acted as if we were the ones who had done something wrong.”

Solely a Way to Go to ClubFed

Sunday, February 22nd, 2015

Until I became a tax professional I had never heard of a “Corporation Sole.” It’s a legal entity consisting of a single incorporated office, occupied by a single person. It’s a corporate structure used mainly for religions organizations so that office holders can have a successor for their office.

When used for a religious organization, a corporation sole doesn’t pay taxes. It has nothing to do with the corporation sole and everything to do with the fact that a church is a charitable (501(c)(3)) organization that generally doesn’t pay tax. Used properly, a corporation sole is a useful vehicle for churches.

Of course, where you and I wouldn’t go the bozo tax element quickly moves. Even though the IRS has warned about corporation soles since 2004, promoters still tried to sell the snake oil to the gullible. One such entity was Trioid International Group Inc. Trioid, here in nearby Henderson, currently markets itself as a company specializing in being a Nevada registered agent and will help individuals set up a Nevada corporation. That seems like a good, legal business (and it likely is).

However, a visit to the Internet wayback machine gives a very different picture of Trioid. Trioid was actively marketing corporation soles in 2005, and had this description of them:

Common law corporation soles are excluded from filing tax returns of any kind under a mandatory exception in the Internal Revenue Code pursuant United States Code, Title 26 §508(c)(1)(A) and there are no record keeping requirements which may be imposed by any taxing or revenue authority. Corporation soles are not required to make any application for this exclusion or exception and are not required to qualify under §501 (c)(3) as a “church”. In other words, the sole exists due to your natural right to freedom of belief and as such, there is no law respecting its establishment or operation which may impair it, including taxation. To tax the overseer is to tax the sole. The tax Code exception provides the corporation sole with the status of “nontaxpayer” in contradistinction to “taxpayer”. The federal courts have ruled that Congress makes no tax laws that apply to nontaxpayers!

The above paragraph is basically out-and-out tax fraud.

Helpfully to prosecutors, the names of the two individuals behind Trioid were in plain view on the web pages: Gerrit Timmerman and Carol Sing. They were indicted back in 2013 and were convicted on Friday of conspiracy to defraud the United States related to their promotion of a tax fraud scheme. They’ll likely get some time at ClubFed to think about what they did.

As always, the usual warning applies: If it sounds too good to be true, it probably is. If you use a corporation sole as a vehicle to avoid taxes, you’re heading down a road that leads to ClubFed.

Old Fashioned Theft Leads to New Fashioned Identity Theft

Thursday, January 22nd, 2015

A case out of my old home town of Visalia, California lets us know that sometimes there’s just not much you can do to prevent yourself from being a victim of identity theft. Back in 2011 Rebekah Root either stole documents from an IRS office in Visalia or she obtained them. (The original announcement from the DOJ doesn’t make it clear which is the case.) She then proceeded to commit identity theft using those documents.

TIGTA (the Treasury Inspector General for Tax Administration) investigated the theft, and when they found out that the paperwork was used to file returns on those individuals IRS Criminal Investigation joined in finding the culprit. Ms. Root pleaded guilty last year to wire fraud, making a false claim for a tax refund, and aggravated identity theft. She received 45 months at ClubFed for the $50,000 in fraudulent tax refunds she had claimed.

Former Mayor (and Current CPA) Learns of Tax Fraud, Joins the Conspiracy

Friday, January 16th, 2015

This is for the don’t do this at home file for tax professionals. Kenneth Harycki is the former mayor of Stillwater, Minnesota. He’s also a licensed CPA in Minnesota (but probably not for much longer). Mr. Harycki will provide an interesting lesson the next time I teach ethics.

Mr. Harycki provided accounting, tax, payroll, and bookkeeping services to clients. Back in 2007, he provided services to Model Health Care. From the Department of Justice press release:

Within the first few payroll cycles for Model Health Care (Model), a company controlled by the two separately charged co-conspirators, the defendant concluded that while payroll taxes were being withheld from the wages of employees, those taxes were not being paid over to the government. The defendant learned that these co-conspirators had directed that the withheld taxes not be paid to the government and, instead, the taxes would be used for other purposes, including compensating the co-conspirators and their family members and funding other businesses operated by the co-conspirators.

Now, let’s assume you’re a tax professional and you learn that a company is withholding payroll taxes and not paying them to the IRS. Would you:
(a) Tell them that the taxes aren’t being paid, that’s violating the law, and you need to fix this (which could include setting up payment plans with the IRS and Minnesota, or just paying the withheld funds);
(b) Tell them that if they don’t start remitting the withheld funds that he would need to quit the engagement; or
(c) Join the conspiracy.

Choice (c) is not one that most of us would consider. It is, though, the one that Mr. Harycki not only considered but did:

According to the defendant’s guilty plea, on February 18, 2010, HARYCKI created the entity MKH Holdings, Inc., to assume control over bank accounts used to fund businesses operated by the co-conspirators. The entity was used to cause funds falsely reported on income tax returns to be paid to the co-conspirators and others. During the course of the conspiracy, HARYCKI also incorporated other businesses, obtained employer identification numbers, paid for personal expenses, filed false tax returns, and opened and used numerous bank accounts for the benefit of the separately charged co-conspirators in order to avoid payment of taxes.

Given that the tax loss is between $1 million and $2.5 million, Mr. Harycki will be heading to ClubFed.

There’s not much to add to the press release. If I discover a defalcation while preparing a return, it’s my responsibility to tell the client. And if my client tells me he’s going to continue the actions, I’m required to quit the engagement. I’ve had to do this once in my career; if I discovered such a fraud I’d make the easy decision to get out the engagement. Apparently Mr. Harycki’s ethics were a bit different than most CPAs and EAs. My. Harycki has received a nomination for the 2015 Tax Offender of the Year, though.